Taxation and Law
Taxation and Law tests the application of Sri Lankan income tax and VAT rules, together with core company and contract law principles that affect business decisions.
Core rules
- Income tax under the Inland Revenue Act No. 24 of 2017 uses a tax year from 1 April to 31 March; a resident company is taxed on worldwide income, while a non-resident is taxed on Sri Lanka-source income.
- Taxable income starts from accounting profit, adds back non-deductible items and accounting depreciation, deducts capital allowances and eligible losses.
- VAT is charged on taxable supplies; output tax less input tax is payable, subject to registration and record-keeping rules.
- Companies Act No. 7 of 2007: incorporation creates a separate legal person; directors owe duties to the company and annual filings must be made.
- Contract law requires offer, acceptance, consideration and intention to create legal relations; remedies include damages and specific performance.
Worked example
Accounting profit before tax is LKR 5,000,000. It includes depreciation of LKR 500,000 and a non-deductible fine of LKR 200,000. Capital allowances are LKR 800,000 and an eligible tax loss brought forward is LKR 400,000. Taxable income = 5,000,000 + 500,000 + 200,000 − 800,000 − 400,000 = LKR 4,500,000. At the standard 30% rate, tax = LKR 1,350,000. The reasoning is to adjust accounting profit to the tax base before applying the rate.
Traps
Deducting accounting depreciation instead of capital allowances; treating fines as deductible; confusing VAT with income tax; assuming incorporation always protects directors from personal liability for fraud; ignoring the tax year.